Do Sharia compliant bonds perform better than conventional bonds : an example comparing Sharia bond index with a conventional bond index

Abstract

This dissertation studies the performance of Sharia compliant bonds and tries to compare such performance with that of conventional bonds using sukuk and corporate bond indexes. The performance analysis is based on both the returns as well as the risk adjusted returns with an additional view on the risk of each index. The study also takes into consideration three different economic cycles throughout the period under review. In fact, the performance is analysed during an economic boom, during a financial crisis and also through a period of economic recovery. It was found that during the whole period under review, sukuk bonds tend to yield higher returns than conventional bonds. During the different periods, the returns vary, whereby during an economic boom, whilst conventional bonds had negative returns, sukuk bonds had a slow but constant positive return. On the other hand, during the crisis sukuk bonds suffered a larger shock in returns than their conventional peers, whilst after the crisis, sukuk bonds managed to recover more quickly than conventional bonds with the returns growing at a faster pace than before the crisis. On a risk adjusted basis, returns for sukuk bonds were also better than conventional bonds for the whole period under review. Before the financial crisis, risk adjusted returns outperformed their conventional peers even though they had higher volatility. On the other hand, sukuk bonds underperformed during the crisis, albeit the results were inconclusive. Following the crisis, sukuk bonds managed to yield higher risk adjusted returns than their conventional counterparts.